Fifty Fifty

The rapturous applause on Dalal Street signals relief that political populism was not allowed to derail the economy. However India's long-term growth needs immediate policy intervention not neutrality.

PICTURE SPEAK

POLITICIAN VS THE REFORMER: In Budget 2006 Chidambaram walks the tightrope

Budget 2006 is essentially Chidambaram's tight-rope walk across a minefield. If he had tilted either way sainthood would have been assured. With the Left Front already in election mode in Kerala and West Bengal, Chidambaram astutely avoided the temptation. Predictably CPI(M)'s Basudeb Acharya dubbed the Budget "regressive" for not spending enough on "programmes" even as CII Chief Mentor Tarun Das said "industry will be happy as there are no major negatives".

Such are the perils of managing expectations in a coalition era that more than doing the right thing, not doing anything wrong is seen as a virtuous act. Sure he has rationalised excise, expanded service tax and spoken about agricultural credit as also equitable growth. He has also used the bouyant tax collection and pared fiscal deficit although it is now threatened by the wrath of the sixth pay commission. To his credit even as he did all this, Chidambaram has ensured that his essay neither threatens growth nor the political equilibrium. But the ratings are largely fifty-fifty for the good done and the lost opportunity for doing good.

What He Did

Rationalised excise duties, made goods like small cars cheaper Provided short-term credit for farmers at the rate of 7 per cent Brought fiscal deficit under control and FRBM back on the agenda Announced a road map for unified goods and services tax Expanded the service tax net bringing it in line with the sector's growth

What He Didn't Do

Investment is critical for growth yet no move made to ease FDI caps No accountability for expenditure in the social sector yet Boost required for infrastructure development absent No plan for or action on non-merit subsidies as of now Disinvestment and labour reforms are still off the agenda

Chidambaram, though, dismisses lament about lost opportunities (see interview) as the blinkered perspective of a tax-break-hungry urban audience. Truth is, whatever Chidambaram the reformer may have wanted to do was corralled off as a no-flight zone by Chidambaram the pragmatic politician. As Sunil Munjal CEO Hero Corporate Services said, "Even the reforms alluded to in the Economic Survey, like labour reforms find no mention in the Budget."

Chidambaram argues that it is far more important to provide capillary links, take growth to the villages and make it more equitable. He is right, too, for the country cannot continue to be Bharat and India in patches. But it takes more than just intentions and pious platitudes to achieve this. Opening up food processing and retail to FDI could unlock values for farmers and provide jobs in rural India but the Left and the Congress don't think it is critical. India spends over Rs 60,000 crore on poverty alleviation but outlays don't translate into outcomes. It costs the Government nearly Rs 4 to deliver Re 1 to the poor; there is no accountability. Outlays don't translate into expenditure either, as unspent money is used to fund deficits. But neither this Budget nor this Government has shown any evidence that it is willing to challenge the status quo with policy intervention.

Last month, Chidambaram and Commerce Minister Kamal Nath had taunted the rich at Davos if they could afford not to be in India. The truth is that there is more investment out of India than into India. FDI is stuck at a neo-Hindu growth rate of around $3 billion per annum. The Ratan Tata-led Investment Commission told the Gover-nment last week to "act on labour reforms, speed up infrastructure development, cut red tape and remove FDI caps" if it is serious about attracting investments.

There is a belief among policy makers that growth can be on auto-pilot. This is a perilous presumption. The low interest rate story that enabled corporates to compete, banks to lend and triggered consumption to deliver growth has played out. Interest rates are rising and the economy needs policy intervention. Sheer demographic mass cannot deliver growth momentum without the velocity of reforms.

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